GSE bailout was really a stickup

A recent op-ed in American Banker promoting the shibboleth that Fannie Mae and Freddie Mac required a government bailout in September 2008 repeats a shopworn lie, as evidence has clearly shown in shareholder lawsuits.

A brief history lesson is in order.

Under the U.S. GAAP accounting rules at the time, both Fannie and Freddie were unquestionably in full compliance with capital requirements when they were forced into conservatorship. True, they had been incurring losses due to the then-raging financial crisis. Still, Fannie and Freddie had the highest capital cushions in their histories and were flush with cash.

It was only after the government obtained control that it was able to fire the directors, replace management and order the companies to start booking billions of one-time, noncash charges. These "cookie jar" accounting entries ultimately required Fannie and Freddie to accept $191.5 billion from the Treasury Department. And issue it an equivalent amount of preferred stock bearing a 10% dividend in order to maintain a positive-book net worth.

Flash forward to the 2012 summer, when the housing market had turned around: Under the same GAAP accounting rules, the write-downs had to be written back up. Alarmed that the government-sponsored enterprises’ unexpected return to profitability would end up resulting in their release from conservatorship, Treasury changed the terms of its preferred stock — retroactively.

The 10% dividend was replaced with a new one equal to 100% of the companies’ net worth (minus a de minimis reserve), payable in perpetuity.

More akin to a concrete life preserver than a rescue, the new arrangement is liken to a restaurant owner who accepted cash from the mob. Fannie and Freddie will be in hock to Uncle Sam for the rest of their corporate lives.

Indeed, a top White House official confessed as much in an Aug. 18, 2012, email that was disclosed through a shareholder lawsuit. It showed that the real reason for changing the terms was to ensure the GSEs would not be allowed to “repay their debt and escape.” So the government has already collected $115 billion more than it advanced.

Nonetheless, the author of the recent op-ed appears to believe that nationalizing Fannie Mae and Freddie Mac without compensating their shareholders was appropriate; that the legacy shareholders deserve nothing.

Finally, just three days before their seizures, Fannie and Freddie were able to tap the capital markets for roughly $6 billion of unsecured debt in an oversubscribed offering. It was underwritten by a who’s who of Wall Street investment banks, and was given an AA+/AAA- rating. Does that sound like housing companies which the author of the op-ed claims were “on the ropes” with “no easy way out”?

This author is peddling a false narrative. To the contrary, the record is clear that the government’s seizure of Fannie Mae and Freddie Mac wasn’t the bailout the government claimed at the time. It was a stickup.